p2:
When you need to buy/sell a large amount of an illiquid stock, the first thing you do is make some calls "upstairs" to the trading desks on the street, in order to find a "natural" (another institution willing to buy/sell your stock in decent size) Most stocks have an "axe" - firms that always seem to be a good part of the volume - even if it's a listed stock. It's important to learn who trades what as it can save you a lot of heart ache (and money) in the long run. Another point is that you can't call too many firms, or everyone on the street will know there's a large buyer/seller out there. (Actually, the proper etiquette is to only talk to one firm at a time, and give them a chance to come up with the other side of the trade.)
Let's say for example that I need to sell 500,000 shares of PSC. The first thing I need to know is why. If we're selling because we just had a conference with management and the analysts think they may miss their number, then I need to get out before they report earnings, whenever that may be. But if we're just reducing our postion to free up cash, then I might have more patience.
Now I make my calls, let's say Smith Barney and Goldman. I talk to the traders and let them know I've got 25,000 for sale and maybe more behind it. (Never tell your size until you absolutely have to) They'll immediately ask for a working order, and in this case I would say no - I'm looking for a natural and I don't want any stock for sale on the floor. They will now make calls to other large holders of PSC. You can get that information off Bloomberg, but all of the sell-side trading desks have "focus lists" from their institutional clients, which is basically a list of all the stocks in their portfolios, which is more up to date. If they can drum up some interest, they will call me back and the game starts. In illiquid stocks, the buyer almost always has the advantage because he doesn't have to do anything. He can always walk away whereas the seller has to eventually sell. If PSC is around $27, I might get a bid of $26.50 for 100,000 shares. If the buyer wants 200,000, I might get a bid of $26. The larger the print the lower the price will be. If I'm able to sell the whole block the buyer will want to know if that "cleans me up" - meaning have they taken me out of my position or am I done selling the stock. This will also affect the price of the transaction. No body wants to buy 500,000 shares of a stock and then watch the price go down another 1 or 2 dollars over the next few days, as I continue to sell. Mind you - I could lie about it and sell more afterwards, as there is no law against it, but my reputation would be ruined and no trader would ever want to deal with me again, thus hurting my chances to execute trades in a favorable way in the future.
Let's say however that there doesn't appear to be any naturals out there. Goldman will still ask to work my order (meaning they will give it to their guys on the floor, who in turn will just give it to the specialist) all of which will cost me a minimum of 5 cents per share to Goldman. Therefor it makes more sense to call our own floor broker (most large institutions use a two dollar broker or have their own) and work the order myself (and pay around .6 cents per share - commisions are determined based on yearly volume). A stock like PSC will NOT have a crowd around the specialist. On any normal day the specialist will keep the spread fairly wide and just sell small lots on the offer and buy small lots on the bid. But today is different and I give my floor broker 25,000 to go but only show 10,000 at a clip. He then gives the specialist my order (no floor broker needs to stand there all day) who in turn will want to know what the full picture is (if there's more behind it). I personally am not too fond of specialists. Obviously they are out for their own interests, as we all are, but letting them know your true picture can be disasterous. I often have seen stocks like PSC trade down a dollar on a few hundred share lots and there's nothing you can do about it. And remember - the specialist almost always makes money. If he's willing to buy my stock I almost always refuse (unless I'm desperate), because I know he'll have more behind it. He'll only buy for his own inventory when he is most certain that the stock will go up.
Anyway, once the specialist has a decent size order (like 10,000 in PSC), he'll do the same as Goldman did, which is look for buyers. Here the specialist has an edge because he knows who the most recent buyers are and he can contact them immediately (they will be other floor traders reperesenting various firms). These traders will contact their clients and see if there's any interest. Usually the interest is in smaller size, but occasionally you get lucky and catch a large buyer in which case you negotiate the same as you would with another firm. The only difference here is that the specialist will want to buy some stock too, especially if he knows that it cleans me up.
But if there are no large buyers out there, you just have to pick away, and let the specialist find any type of buyer, all the while protecting me in the book (just in case a dot order comes in). If the volume is 60,000 for the day, in a stock like PSC I can expect to be about a third of that, thus selling about 20,000 shares. Sometimes you can be half the volume, but unless you put up some block trades, you won't be more than that. If the specialist is good, the stock will only drop slightly, but more often than not in this example it would be down probably 25 cents or so (obviously other market factors can help determine this, but this is usually how it goes).
-cont-
